J.C. Penney falls short in third quarter, looks home for improvements in 2010

Expect a Kohl's vs. Penney's remodeling face-off next year, and new additions in their home departments. While reporting their third-quarter results this week, the department store rivals both said they're planning to focus on remodeling stores in 2010, and will pay more attention to their housewares departments, which have not been as profitable during the housing downturn.

After posting mildly disappointing results for the third quarter, J.C. Penney Co. (JCP) told analysts it plans to stick to its knitting by adding brands and remodeling stores, rather than opening news ones.
Penney's posted income of $27 million during the third quarter, down 78% from last year, mostly due to a $73 million pension plan expense. But even after factoring out the pension expense, operating income for the quarter was below last year's. The company reported earnings per share of 11 cents, which was one penny below Wall Street's expectations. Net sales were down 3.2% and comparable-store sales were down 4.6%.

CEO Mike Ullman said that despite lower sales, the company managed to increase both its profit margin and cash-on-hand during the quarter. Lower costs, more customers buying goods at full price, and rising sales of private-label brands -- which bring higher profits than national brands -- contributed equally to the improvement.

Ullman said sales of private-label brands are running about 5% ahead of the company's average so far this year. He anticipated the addition next year of Liz Claiborne -- which just signed an exclusive deal with Penney's -- will continue the trend. Ullman said the Claiborne brand will launch over 30 product lines exclusive to J.C. Penney stores.

In a conference call with analysts, Ullman said some of the company's free cash will be spent on store remodeling, which accelerated this year as the company added in-store Sephora beauty departments.

But Ullman warned not to expect too many new store openings, despite the glut of available commercial real estate. Penney's is pulling back on its expansion of free-standing stores in suburbs because the housing developments it was counting on to provide customer growth have been stalled by the housing bust. Meanwhile, traffic at regional malls -- where Penney's has a strong presence -- will strengthen, he said.
Predicting a Surge in Home Furnishings

When asked which department Penney's will build up in the future, Ullman noted there is some "white space" in housewares. Penney's has seen some strong sales of the new Cindy Crawford Home collection, especially in soft goods such as linens, he said. That area has potential for growth as the economy rebounds, said Ullman.

"We see some opportunities in the home category, which had been dragging us down," he said. "We think people are getting tired of not spending on home furnishings."

Penney's will find some competition there from a surging Kohl's Corp. (KSS), which had reported a strong third quarter just a day earlier. Kohl's posted net income of $193 million, a 20% increase over last year, and comparable sales increases of 2.4%.

Kohl's management said the company will be very aggressive in remodeling stores now that it has completed the opening of the California stores it acquired from the defunct Mervyn's chain. Plans call for remodeling 65 stores in 2010, but that number may increase if the economy continues to improve, said CEO Kevin Mansell.

The company's remodeling plan includes launching an expanded home section next year, which will put more merchandise on the floor, said Mansell. Kohl's plans to add a number of new brands in home and apparel next year, which Mansell said he would announce in February.